Equity markets continue to provide mixed signals in the US with the Dow closing a record close for the 7th day in a row. This outperformance is not being matched by the S&P500, nor for that matter, by the Nasdaq which has helped drive the rally in US stock markets this year.
The US dollar has also remained under pressure, on reports that a grand jury is being convened by US special counsel Robert Mueller to look into the allegations of Russian interference in the US election. The mere fact that this is being talked about in such terms would suggest that the evidence is there and is waiting to be found.
It also proved to be another mixed day for markets in Europe yesterday with the FTSE100 outperforming on the back of a weaker pound, which slid to a nine month low against the euro, after the Bank of England kept rates on hold.
It wasn’t too great a surprise that the two remaining June dissenters in the form of Michael Saunders and Ian McCafferty both voted for a rate rise, but they weren’t joined by chief economist Andrew Haldane, who it was thought might join them. He opted to err on the side of caution, despite his comments in the wake of the June meeting, where he suggested he was leaning in the direction of a possible rate rise.
Not unexpectedly the bank downgraded its growth forecast down from 1.9% to 1.7%, in line with the IMF, while also cutting their expectations for wage growth to 3% in 2018 from 3.5%.
Inflation forecasts were left unchanged, but this downgrading of the UK economy and wages expectations knocked the pound back as markets priced out the prospect of a rate rise by the end of the year as a lower probability.
The Bank of England governor tried to spin the narrative to say that the markets were under-pricing the prospect of future rate rises, but no-one was buying it, with the pound dropping more than a cent against the US dollar and falling below 1.1100 against the euro.
With the market going cool on the prospect of a rate rise this year from the Bank of England, this could well transfer to expectations around the US Federal Reserve and their next move on rates.
Investors have been becoming increasingly sceptical of the Federal Reserve’s capacity to enact further rate rises, at the same time as looking to reduce the size of their balance sheet.
Today’s US employment report for July could well play into that expectation, particularly as this week’s ADP report disappointed slightly to the downside.
In the early part of this year the two reports did correlate on a fairly consistent level, however this has broken down in recent months, with the official May payrolls surprisingly weak at 152k before rebounding sharply in June to 222k.
Expectations around today’s report are for 181k new jobs to be added, however despite the apparent resilience in the US labour market, this week’s ISM employment components for both manufacturing and services were weaker than expected, and this could introduce some downside risk to today’s jobs numbers.
More importantly wages growth has remained stubbornly weak, and has thus far show little signs of pushing upwards.
The unemployment rate is expected to fall further to 4.3% from 4.4%, with attention on the overall correlation with the participation rate likely to be key here.
This has invited speculation that there may well be a lot more slack in the US labour market than central bankers are able to measure, and it is in this context that the focus on wage growth will remain as intense as ever, and on this measure is expected to slip back from 2.5% to 2.4%, which in all likelihood will be enough to keep the hawks at bay.
EURUSD – continues to hold above the 200 week MA at 1.1795, and now needs to close the week above here to argue for a move towards the 1.2000 level. Support remains back at the 1.1610 level, and below that at the 1.1480 area. Only a break below the 1.1480 area opens up a pullback towards the 1.1300 area.
GBPUSD – the pound slid back yesterday with a key day reversal after making a new 11 month high at 1.3270, after the BoE left rates on hold. The pound still has support just above the 1.3000 level, with only a drop below 1.3000 opening up a retest of the 1.2900 level.
EURGBP – broken above the 0.9000 area and putting it on course for a test of the 0.9300 highs of last year, on a break of the November 2016 highs at 0.9050. Support now comes in at the 0.8980 area, which needs to hold to prevent a pull back to the 0.8870 area.
USDJPY – finding support just above the 109.80 area, but the onus remains for a move towards 108.20. We need to see a move back above the 110.80 area to stabilise and push back towards 111.30, as well as the 112.30 area.
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